The demographic crisis facing Japan has been 35 years in the making. This was the last time the total fertility rate was above the replacement level of 2.1. Since then it has steadily declined to its current level of 1.27 and is projected to improve only steadily over the next 40 years. Japan’s fertility rate had been falling for longer than 35 years but this was from unsustainable levels and was beneficial to Japan as it prevented the country from a soaring population, a recognised burden on growth.

The effects of this prolonged period of below replacement level fertility rate on the size of the population as a whole has been masked by an increasing life expectancy and, at least initially, by a rising number of women of child-bearing age. The demographic structure of the population, however, has undergone substantial change. Below are 5 population pyramids showing how the age structure of Japan has evolved and will continue to change.

In the middle of the last century Japan had a structure typical of a developing country, with anomalies on the male side due to high death rates during the war. Between 1950 and 1990 Japan experienced the ‘demographic gift’ where falling birth rates mean there are proportionally fewer children to care for and the population has not yet aged to the point where an old population will slow growth. In 1990 Japan’s dependency ratio (the ratio between the sum of those aged 0-14 year old and 65+ with those aged 15-65) was at a record low and the older first generation of baby boomers were at their most productive. This also coincides with a time seen a pivotal in Japan’s economic growth history where it shifted from high to low growth.

After 1990 the fall in the population of youths was no longer able to off set the increase in the elderly population and therefore the working-age share of the population started to fall. By 2010 it is clear that any hopes of a reversal have been dashed as the 2nd generation of baby boomers fail to increase birth rates. Compare the size of the population preparing to enter the workforce to that of those preparing to leave, the difference is substantial.

In 10 years time Japan will have become an aged society. An ever shrinking workforce will have to pay for the care of not just a large elderly population but also the super old, before now only ever making up a tiny proportion. Children aged below 10 will make up just 7.4% of the population.

Going forward a further 30 years and the population pyramid is almost a reversal of the one from 1950. The modal age group will be 75-79 years old.

The chart above shows how the 65+ age group will take an increasing share of the total population at a time when total population is also predicted to decline.

With the devastating effects of the earthquake and tsunami still raging and the full economic impact is far from being clear I instead focus on the much longer term and potentially more damaging problem facing Japan, its aging population.

Japan’s economic growth after WWII is rightfully regarded as one of history’s success stories. Between 1960 and 1990 mean GDP per capita increased by 372% or 5.2% a year, making Japan one of the wealthiest countries on Earth. Following the crash of 1989 Japan has suffered through one crisis after another: the recession of the early 90s, the Kobe earthquake, the Asian currency crisis, the dot-com bubble, the 2001 global ‘slow-down’ and the 2008 financial crisis and world recession. Between 1990 and 2009 the mean GDP per capita has increased by an average of just 0.7% per year.

What is the cause of Japan’s economic stagnation? The effects of the multiple crises are surely partly to blame but Japan was able to rise from the aftermath of a significant military loss and through the oil crisis of the 1970s better off. During the second half of the 20th century the composition of Japan’s population changed significantly, initially driving it to incredible economic prosperity and now preventing it from escaping what is effectively a 20 year recession.

In part 2 I will show how Japan’s demographics are undergoing great change and what implications that may have on its economic future.

The Economics Editor of The Sunday Times David Smith’s personal website is great for insightful analysis of the macroeconomics of the UK. Now that The Times online is behind a pay wall this site provides lengthy excerpts of his articles.

Winner of the 2008 Nobel Memorial Prize in Economic Sciences Paul Krugman is mostly associated with the development of New Trade Theory in the late 70s and 80s. He was a strong supporter of Gordon Brown following his reaction to the financial crisis. His blog in the op-ed section of The New York Times is wide-ranging and often in debate.